How Payment Facilitators Can Select a Sponsor Bank with Confidence

A payment facilitator’s relationship with its sponsor bank
is a critical one. When the bank’s own operations are going smoothly,
transactions flow freely and the PF is free to concentrate on growing its
business and serving its customers.

But any disruption at the bank has the potential to
impact the PF’s business as well.

While most payment facilitator / sponsor relationships
operate without incident, there remains the potential for interruption. If
regulators determine that the bank is handling aspects of its business
improperly, that could lead to changes in its relationships with payment
facilitators. In extreme cases, the bank may be required to exit its payment
facilitator business completely, meaning that the PF would have to seek out a
new banking partner.

New board members or management could change direction about
how a bank handles its payment facilitator business – or whether it stays in
the payment facilitator business at all. A bank could also decide to change its
policies based on activity it is seeing within its broader portfolio, limiting
activity within certain geographies or certain verticals, for example.

The most important thing a payment facilitator can do to choose
a sponsor bank and to navigate the relationship with confidence is to develop
as complete a picture as it can of the bank’s operations and any changes the
bank might be undergoing.

What can PFs do?

Before entering a relationship with a sponsor bank, the PF
should understand that bank’s appetite for risk, according to Deana Rich,
co-CEO and co-founder of Infinicept.

“If the bank is willing to take on higher-risk accounts,
there is more likelihood that it could face regulatory scrutiny or changes in
policy resulting from a changing of the guard within the bank’s management,”
she said.

When a prospective payment facilitator applies to a sponsor
bank, that bank will perform due diligence to understand the soundness of the
PF’s business and what sort of risk it is taking on. According to Rich, the
same is true in reverse.

“When choosing a sponsor bank, a payment facilitator should
do its own analysis to be sure it understands how the bank partner’s business
and risk appetite align with its own,” she said.

When talking with a potential bank sponsor, Rich advises
that PFs be prepared to gather information they can use in their own
decision-making process:

Check its rating. Ratings of an
individual bank’s safety and soundness can easily be found online. Banks with
low ratings that indicate performance issues are more likely to invite
regulatory scrutiny and possible disruption down the road.

Find out how long the bank has been registered
with the card networks as a sponsor. According to Rich, newer acquiring
banks could be less likely to have their processes and procedures fully fleshed
out. This could lead to issues with other companies within their acquiring
portfolio. Newer acquirers may also be getting into the acquiring business
because they’re willing to take risks that current acquirers have chosen not to
take.

Ask about the other businesses in the bank’s
acquiring portfolio. While a bank may not tell you actual names of the
companies it partners with, Rich said, it is appropriate for the bank to share
information in aggregate, such as the number of payment facilitators, ISOs and
direct merchants in its portfolio. Also, go beyond the types of arrangements to
ask the bank for further details such as its chargeback and fraud loss ratios.

You can also ask for the merchant category code (MCC) concentration within the
bank’s portfolio, she said. Look for the concentration of businesses that are
within high-risk or ambiguous, “not elsewhere classified” categories. A high
number of ambiguous categories in particular could indicate that bank either
has little information about the companies in its portfolio or is purposely
obfuscating the types of businesses it serves.

Make sure the bank’s policies and procedures
and depth of knowledge indicate values that align with yours. A bank’s high
standards will apply not just to you, but to all the companies within its
portfolio, meaning that you are less likely to be affected by inappropriate
activities of other companies the bank works with.

Finally, Rich advises that payment facilitators maintain
their due diligence beyond choosing a partner. Again, a bank sponsor will
continue to keep tabs on the payment facilitators that are already within its
portfolio, requesting annual financial data, conducting an annual site visit,
and generally being aware of any news about their activities, she said.

Similarly, it is appropriate for a PF to ask its bank about
any negative coverage it might see in the news, and to use the bank’s annual
visit to talk about anything that might have changed within the bank’s management
and its acquiring portfolio.

Payment facilitators can seek expertise from companies such
as Infinicept to help them select and work with sponsor banks they can trust
and that align with their business.